Becoming More Affordable: The Pursuit of Third-Income Sources

Jay Ferguson|February 15, 2018

[Editor’s Note: This post is the second of four that look at alternate funding models and approaches for Christian schools. The purpose of this series is to encourage dialogue, both within the Christian school movement and at individual schools, about the sustainability challenges facing much of the sector. While some of the ideas presented by the authors in this series may run contrary to “traditional” practice in Christian education, the purpose again is not to provide recommendations or guidance, but rather to spark thinking and discussion along these lines. We encourage readers to submit comments below the post to begin the dialogue and share ideas.]

When it comes to funding our schools, most of us run our operations by pulling two levers. There is the “hard income” lever, made up of tuition and fees, or what we charge our parents for our services. Then there is the “development” or “fundraising” lever, or those funds we can raise from school friends and families who care about and want to support our mission. Under the penumbra of these levers fall things like endowment building, planned giving, major gifts programs, and all the mechanisms you have been advised to pursue for years, with varying levels of success. Most consultants and school experts suggest school-funding models employing some combination of these mechanisms, whether it be trying to fund your entire operation with “hard income” and using fundraising for things that enhance the value of your school and its mission, or using some portion of your fundraising efforts to fund operations. In other words, they’re advising us on how we pull the two levers.

But, what if we could create a third lever? What if there were other sources of income out there? What if there were alternatives to raising tuition every year, or at least ways we could defray the amount of the increase? What if we were able to raise funds that actually enhance our schools like funds for teacher innovation, a form of “teacher Shark Tank,” that some schools are currently exploring? Increasingly, schools are engaging in a paradigm shift that could significantly impact how we fund our schools in the future, limited only by the creativity and entrepreneurial spirit of our school family. In so doing, they are mining the capacities of their school families and friends in ways that transcend seeking high cash-capacity donors or trudging toward 100 percent participation levels.

Finding the Third Lever: Outside-the-Box Methods of Giving

I learned about this shift by developing a close relationship with an entrepreneur in my school. His two children have had a great experience with us, and he’s come to love our community. He wants to give to us, but rather than simply writing a check or transferring stock, he wants to give in the way God has wired him to contribute. He owns the rights to a patented device that gives healthcare providers the ability to capture lost income. We are currently working on a deal where, for every placement in a hospital or clinic, our school will receive a percentage of the income. In looking at the pro forma, this could represent a fairly significant source of passive income for our school, more than if my friend were to simply write us a check. Plus, it is a gift that keeps giving as the business and opportunities expand.

This prospect has me thinking: how many entrepreneurs, business owners, developers, and others in our school, who care about our mission and what we’re doing, might be interested in outside-the-box methods of giving? How many might be interested in developing ways that excite their creativity and passion for giving much more than a cash gift would, and ways that demonstrate our school’s belief in them and in their businesses?

The Third Lever in Action

There are currently tremendous opportunities for schools that are creative with their funding models through third-income sources, or third levers. Many of us are already running extensive summer camps or have facility rental agreements with partners in our local community. Some run consignment shops or spirit shops that generate healthy income for the school. Others fund their schools with income generated from real estate holdings, or provide a tutorial center for students outside the school community, or run dyslexia training or college counseling services for the broader community, beyond their own school students. These are just a few examples of ways to generate income that don’t rely on the typical funding models.

Things to Consider

Leveraging the entrepreneurial spirit and creativity of your school family seems to be yet another way of developing a potentially powerful lever of income for your school. In order to take advantage of this resource, it seems to me several important factors are necessary.

First, it requires knowing your school family. What do they do for a living? How well do you know and understand their businesses? These are real opportunities for the savvy school heads to build relationships with their school family constituency, to listen to their stories, to learn about their passions, to discover how God has gifted them. By doing this, the school head will begin to understand what kinds of entrepreneurial spirit and power exist within the school family, and ways those with philanthropic intent could benefit the school. Ultimately, instead of (or in addition to) asking them for a cash gift to your school, you could ask them to consider a gift of a percentage of their business, shares of the income stream from a product placement, or a cut from the proceeds of a deal they may be working on. This kind of request may (as in my case) excite their thinking and help stimulate their recommendations of others inside or outside your school family who might give in this same way.

Secondly, creating this new lever requires knowing whom you can and cannot trust. Having someone’s children in your school requires one level of trust; engaging with them on a business deal requires another. School heads and their boards should be diligent in checking backgrounds and reputations of school family members before proceeding with deals. Even then, opportunities involving gifts to the school of interests or profits are best. Heads and their boards should proceed with extreme caution before investing school funds entrusted to them in business ventures. A friend and former school head was once approached by a school parent who owned a services company, and who believed he could sell it to a much larger Fortune 500 organization. He approached my friend, and proposed giving the school 10 percent of the sale, which he estimated could be as much as $20 million. My friend sought counsel from another school parent who had actually been successful in selling companies, and who warned my friend against getting involved in something so speculative. He said, “If there’s not an actual deal, it ain’t real.” This wise counsel saved my friend time and money, as the deal never materialized.

Third, even when proceeding, it is important for heads and their boards to get professional advice before moving forward with a deal. Having an attorney ensure the school is protected from liability and risk is minimized is vital. Furthermore, schools can probably expect to pay taxes on earned income from third-party streams, unlike tuition payments. Therefore, gaining the insight of a CPA or tax professional before engaging in third-income ventures is also critical.

Finally, school leaders must ensure they have the time and energy to devote to the maintenance of the new enterprise, or have mechanisms (mostly people) in place to provide whatever management is necessary to steward the gift properly. This includes not only acknowledging and showing appreciation for the gift, but also managing the income stream, obtaining the appropriate professional advice, or, in some cases, providing a higher level of oversight or management. Unless you are an unusually gifted school leader, you probably have neither the time nor the competence to provide the level of oversight some of these gifts require. In fact, you may have thought about similar income streams in the past, but rejected them because the prospect of getting into the “whatever” business—in addition to running a school—overwhelmed you. Counting the cost is just good planning and wise stewardship, and either ensuring on the front end that you have a plan in place to oversee the third-income source appropriately or engaging in only those opportunities requiring minimal oversight is a must.

In this day and age, however, with school sustainability being one of the pressing issues on the minds of school heads everywhere, we probably cannot and should not immediately reject such a potentially potent source of income. Rather than fighting tooth and nail for new students, or fighting our parents over each percentage we increase tuition, these third-lever opportunities provide new, potentially unlimited ways to reduce the tension caused by pulling just the traditional two levers.

About the Author

Jay Ferguson, JD, PhD, is the headmaster of Grace Community School, Tyler, Texas. He practiced law for 10 years and, in 2002, joined Grace as development director before assuming the headmaster role in 2003. He’s written extensively on Christian education and training children, including his weekly blog, The Head and the Heart. He can be reached via email at jferguson@gracetyler.org.